FedEx

Web Shoppers Beware: FedEx to Charge by Package Size

'Dimensional' Pricing to Jolt E-Commerce, Especially if UPS Follows Suit

FedEx is raising prices on more than a third of its ground shipments, those bulky but light-weight packages carrying popular items like diapers, sweaters and shoes, in a surprise move expected to shake up the world of e-commerce. WSJ's Laura Stevens has the exclusive details on the News Hub. Photo: Getty Images. FedEx Corp. FDX -1.33% is changing the way it charges to ship bulky packages, jolting e-commerce companies with price increases for delivering items as diverse as diapers, shoes and paper towels.

Instead of charging by weight alone, all ground packages will now be priced according to size. In effect, that will mean a price increase on more than a third of its U.S. ground shipments.The big question now is whether United Parcel Service Inc. UPS +0.16% will follow the pricing move. Many analysts think it will. The two companies have historically matched price increases rather than seize the chance for a competitive advantage.If so, that would likely greatly affect bulky but lighter weight items like toilet paper and diapers, which many people have delivered on a regular basis, as well as Zappos.com shoes, which ship for free, including free returns. Indeed, shoe shoppers are encouraged to buy multiple pairs, keep what fits and return the rest. Avid Web shoppers do the same with sweaters, dresses, and jackets at retailers like J. Crew, Banana Republic, and Macy's.

 

Last Friday evening, at the bottom of a FedEx announcement mostly about higher fuel surcharges, the company added—in a little-noticed coda—that it planned to apply "dimensional weight pricing" to all ground shipments starting in January. Prior to this, only the biggest ground packages—measuring three cubic feet or more—were priced this way, with customers charged the higher amount by either volume or weight. All air express packages are already priced by size plus weight."The joy ride is over," said Satish Jindel, president of ShipMatrix Inc., a developer of shipment-tracking and analysis software.Under the new rate system the price of shipping an eight-pound, 32-pack of toilet paper between 601 and 1,000 miles would increase 37% to $13.81.The change in pricing could dramatically affect either online shoppers or retailers or both. Someone will have to swallow the estimated hundreds of millions of dollars in extra shipping costs.

Shipping is already one of the biggest and most rapidly increasing costs for big online retailers, a factor cited inAmazon.com, AMZN -1.50% Inc.'s recent testing of its own delivery service.UPS said it reviews pricing on an annual basis. "We continually evaluate our policies to remain competitive in the industry. Our focus is on being fairly compensated for the value we provide to our customers," a spokesman said.Retailers would likely hesitate to increase what they charge for shipping.Surveys show that shoppers abandon their online purchases at checkout when they see a big shipping fee. Instead, retailers may charge more for the merchandise to cover the cost.

Hardest hit by the change would be shipments of some of the often-replenished items increasingly bought online—sometimes by subscription—to avoid a trip to the store.FedEx declined to estimate how many packages might be affected or by how much."The primary concern for us is that we want to make sure we're getting an appropriate price for the value of service we're providing," said spokesman Jess Bunn.Both Zappos and Diapers.com are owned by Amazon, which generally uses UPS's ground service, among other delivery companies. Amazon's popular Subscribe & Save program sends customers regularly depleted household items like paper towels, dog food and cereal, with free shipping.Amazon and Zappos didn't respond to requests for comment.For the delivery companies, it comes down to efficiency. Lightweight e-commerce orders take up a lot of room in the truck, and Amazon and other shippers don't always match the box size to what is inside.

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By one estimate, the new 'dimensional weight pricing' rates at FedEx could mean the price of shipping toilet paper—something light weight but large (and frequently bought online)—could rise more than 40%. REUTERS

E-commerce retailers will be affected by differing degrees, depending on their ability to negotiate pricing with FedEx, analysts say. The biggest companies, like Wal-Mart Stores Inc., Walgreen Co. and Saks Fifth Avenue, will likely attempt to grandfather in current pricing rules when they renegotiate contracts. During a similar price increase in 2011, many retailers negotiated a phase-in of the new rules.Wal-Mart, a large FedEx Ground customer, declined to share the terms of its specific agreement and said it has "a long-term, collaborative relationship with Fedex." Wal-Mart's global internet sales grew even faster than Amazon's in 2013, rising 30% to $10 billion.

 

Smaller retailers will have less room for negotiation and so will be more likely to have to pass along the price increase in some way to customers.Bill Ashton, vice president of operations for Modnique.com, which sells apparel, shoes and handbags online, estimates that the shift to dimensional pricing will work out to a 30% increase on many items shipped by smaller retailers.Retailers currently have more incentive to stuff as many items into a box as possible because they receive price breaks on weight. While a four-pound box costs more than a two pound box, it doesn't cost twice as much.Companies like Zappos use elaborate algorithms to determine exactly how many items should ship in a box to minimize the cost.Under FedEx Ground's current pricing, a one-pound square package with 12-inch sides—which might hold several shirts—would be priced by weight and cost $6.24 to ship the shortest distance.After the changes, FedEx will use the same calculation it uses for air shipments: the volume of the package divided by 166, a calculation based on the amount of space in the cargo area of a plane.This way, the same 12-inch box would be priced at $8.83, a 41% increase. If an item is heavier than its "dimensional weight," the customer will be charged the higher amount.Higher shipping costs may not deter online retailers from selling diapers and toilet paper in bulk because those recurring purchases keep shoppers coming back to their websites, increasing the chances they will buy other things, too. Instead, more retailers might try to spur shoppers to increase the size of their "baskets"—by getting them to buy more packaged consumer staples in a single purchase to maximize shipping efficiencies, said Brian Cohen, general manager of Etailing Solutions, an e-commerce consultancy that focuses on packaged consumer goods.Last month, for example, Amazon introduced a service called Prime Pantry that, for a flat $5.99 delivery fee, will ship up to 45 pounds of household products, from snacks to soda and detergent, in a fixed-size box that measures four cubic feet.ShipMatrix, which analyzed data from hundreds of millions of packages shipped from more than 50,000 U.S. locations, found that about 32% of all ground packages will be affected by the price increase, and the majority of those weigh less than five pounds. Other analysts agreed that more than 30% of shipments would likely be affected."This is FedEx trying to figure out how to better manage their margins for the packages they already have," said Travis Burt, a partner at Transportation Impact, LLC, which audits on behalf of shippers, as well as helping with negotiations.UPS will follow suit within a few months, analysts believe."It's almost a foregone conclusion," said Rob Martinez, president of Shipware, a shipping strategy consultant and auditor. "They have a history of hitting each other like prize fighters back and forth."